Cloaking a person with implied authority may bind the company in unexpected ways.
During the economic expansion of the last decade, many companies compensated their employees handsomely: Regular raises and stock options were the norm. But things are changing in the new environment. We are again seeing employers offering workers better titles in lieu of money.
Suddenly, everyone is a vice president. But this scheme entails considerable risk. By giving someone an impressive-sounding title, the company may be cloaking that person with the implied authority to bind the company in ways it did not expect.
Under established legal norms, a party is bound by the commitments of its agents when they act within the scope of their authority. Thus, a company will be bound by a commitment made by one its officers unless that commitment is clearly outside the person's authority.
An agent's authority may be express or apparent. Express authority is established when a company announces to an employee and to the outside world that the employee may take certain actions on its behalf. Apparent authority is established when a company places a person in a position that implies the person has such authority.
Determining an individual's apparent authority depends in part on custom and practice within the industry involved. If it is common that a person with a particular title has certain powers, providing that title to an individual automatically conveys those powers.
In Essco Geometric v. Harvard Industries, a court determined that a government contractor was obligated to honor a long-term subcontract for supplies awarded by its purchasing manager, even though the purchasing manager may have violated company policies in awarding the subcontract. That's because it was customary in the industry for purchasing managers to make such arrangements.
Determining apparent authority may also be affected by the course of dealings between the involved parties. If a company allows a person to act on a contract as though he or she has authority to bind the company, the company cannot disclaim responsibility for that person's commitments.
Awarding a title of vice president carries particular risks. In general, people formally designated by a com.pany's board of directors as officers of the company carry real authority to bind the company to contracts. People not officially designated as officers but who are given a title of vice president will not have such actual authority.
But they may have apparent author.ity, which amounts to the same thing. For example, as demonstrated in the Video Engineering Co. case involving the Transportation Department, another agency's board of contract appeals ruled that a company's vice president for marketing is cloaked with apparent authority to enter into a government contract that binds the company, regardless of any limits on that person's actual authority.
Giving an impressive-sounding title might seem like a cheap way to recognize a person's efforts. But companies should carefully consider the risks.
Peckinpaugh is corporate counsel for DynCorp, Reston, Va. This column represents his personal views.
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